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New U.S. home sales surged Purchases of new U.S. homes surged in December and 2015 was...

New U.S. home sales surged Purchases of new U.S. homes surged in December and 2015 was the best year for housing since 2007. Existing­home sales also increased in the best year since 2006. The inventory of existing homes on the market was smaller than demand.

Where do new­home sales appear in the circular flow of expenditure and income? Explain how a surge in new home sales affects real GDP?

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Answer #1

Circular flow diagrams represent flow of goods and services and flow of money between various sectors of the economy . New homes are manufactured by households usually for selling or renting purpose . So households spent of building new homes . These homes if sold as capital good ( renting ) then flow of money occurs from firms to households .

Building of new homes is investment expenditure . So it appears in the investment component of GDP . We know that GDP is sum total of consumption , investment , government expenditures in a closed economy . So surge in new home sales raises real GDP .

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